Last week, the journalists at Responsible Investor discussed the words and phrases we would ban from the ESG landscape if we could. “It’s an evolution, not a revolution”; “We can’t let perfect be the enemy of good”; “You can see that we’re leaders on sustainability because we’re signed up to the PRI”; and so on and so on.
Top of my own list was the phrase: “We’ve reached a tipping point”. It never seems to mean very much, or be quantifiable. The green bond market has ‘hit tipping point’ about 50 times in the five years I’ve been writing about it, and the SDGs are regularly doing the same now, closely followed by ‘investor awareness’ about sustainability.
But then, something happened.
Yesterday, sitting in the European Commission building in Brussels, for the High-level conference: A global approach to sustainable finance, I watched tens of politicians, company leaders, central bank representatives, campaigners, investors and others (almost all men, but I’ve written that piece already), gather to discuss sustainable finance. The discussions stayed surface-level for the most part, but the event – the third of its kind held by the Commission – felt different from previous years. There was a genuine sense of urgency. And, for the first time, everyone seemed to have a relatively credible game plan.
“Asset management is one of the highest paid industries – it has been recruiting the cream of the colleges over the last decades – and yet they say they cannot change their business practices without getting regulated? That’s embarrassing.” – GPIF’s Hiro Mizuno
While the 2017 and 2018 conferences were focused more on discussing the obstacles and objectives that lay ahead, this year the Commission actually had some concrete achievements under its belt. The wish lists of the past few years are now – to an immature, but promising extent – accomplishments. Two out of the three legislative proposals tabled last May have reached political agreement, with the third in the late stages of negotiations, and plenty of smaller amendments underway in other regulatory areas. There are more than 200 people working to tight deadlines to develop a green taxonomy, which is already being integrated into the investment and issuance strategies of big institutions like BNP Paribas Asset Management and the European Investment Bank, despite not being finished.
But it wasn’t just the EU. The event was geared towards pulling together voices from all over the world, and a number of other regulators and policymakers took to the stage with bullish comments about their role in creating more sustainable markets.
Ashley Ian Alder, who chairs the International Organisation of Securities Commissions (IOSCO), and is the CEO of Hong Kong’s market regulator, told the audience that climate change had gone from being “part of the CSR debate” to becoming about “a set of important longer-term financial risks”. “That means the topic falls squarely within our remit,” he concluded. IOSCO set up a sustainable finance network in January, but from Alder’s comments it won’t hang around. “I’m all for debate and discussion, but I get frustrated when implementation is delayed. And the problem with climate change is that we simply cannot wait.”
Frank Elderson, Chair of the Network for Greening the Financial System and Executive Director of The Netherlands’ central bank, DNB, pointed out that he doesn’t have to wait. “I challenge all the central banks and supervisors of the world not to ask what legislation can do for you, but ask what you can do without legislation. And I have quite some answers for central banks. They can, and they should, integrate [climate-related] financial risk management into their micro-prudential supervision. They can, and should, integrate [climate risk] into their macro-prudential supervision, by means of stress testing and by means of scenarios. They can, and should, integrate climate thinking and risk management into their own reserve management. They should lead by example.”Mark Carney, Governor of the Bank of England, reflected on the progress of the TCFD, which he initiated during his time at the helm of the Financial Stability Board, saying that group has analysed, and would present on, the types of disclosure that are “most decision-useful” for investors, and best practice for scenario analysis, at June’s G20 Leader Summit.
The head of sustainability at Japan’s Financial Services Agency, Satoshi Ikeda, confirmed that it was working with government to launch in May a TCFD consortium to push “constructive dialogue between institutional investors and companies” on climate change in the country.
Elsewhere, France’s Minister of State, Brune Poirson, announced that once again it was offering a prize to investors with the best ESG reporting methodology, because “what we urgently need is standardisation in methodologies,” three years after the implementation of Article 173. The German Government confirmed in an email yesterday that it will “examine whether issuing a green or sustainable bond is economically viable” – a green bund would make the asset class un-ignorable in global financial markets. The Finnish Finance Minister, Petteri Orpo, called on his peers to join a new initiative dedicated to developing best practises for finance ministries globally on sustainable finance. The group has met once so far, with around 15 countries represented.
“Without finance ministers’ work it’s not possible to stop the climate,” he said, speaking also on behalf of Chile’s Finance Minister, Felipe Larrain Bascuñán, who co-chairs the group. “Of course, we can do a lot with diplomacy while drinking in cappuccino bars, but Finance Ministers have some of the most powerful tools: we have taxes and we have budgets. So we decided we have to do something.”
Importantly, on the asset owner side, there were ambitious but tangible solutions being laid down. Hiro Mizuno, who heads up the biggest pension fund in the world (GPIF, $1.6trn AUM) said it “wasn’t feasible” for universal owners like him to simply avoid all risks. “Instead, we have to contribute to making the capital markets a more sustainable place for us to invest”.
Part of that process involves tackling asset managers (GPIF runs all its money through third parties), he went on. “Mind set is the biggest issue our industry is facing. I’ve heard several times that asset managers are almost crying to have regulation to change their behaviour. The asset management industry is one of the highest paid industries – it has been recruiting the cream of the colleges and MBA students over the last decades – and yet they say they cannot change their business practices without getting regulated? That’s embarrassing,” he said, to much applause from the floor.
Another option, he suggested, was for asset owners to take charge and change the contracts they offer asset managers. “One example that we’ve been trying to get others to follow is that we’re now changing our asset manager contract from annual renewable to five-year-plus. So that the asset manager has zero incentive to make short-term returns at the expense of long-term or cross-generational consequences”.
Jean Jacques Barberis, Co-Head of Institutional Clients at Europe’s biggest asset manager, Amundi, acknowledged that there was a “chicken and egg” situation with asset owners and asset managers, where each was waiting for the other to tell them what to do on sustainability. But, he said, asset managers had a responsibility to conduct research to keep proving to institutional investors that ESG was good for returns, and to offer them more products across more asset classes that aligned with sustainability.
So, the conversation has finally moved beyond ‘if only’s, to practical, concrete solutions. It’s gone from intellectual exercises by ‘true believers’ to global coordination at the very top levels of policymaking, investment and finance. To have regulators bringing environmental and social elements so explicitly into mainstream financial regulation is a major step, highlighted the PRI’s Nathan Fabian, who leads the Commission’s Technical Expert Group on sustainable finance. “Only a few years ago, this would have been seen as heresy.”
And he’s right. It feels… well… Like we might just have reached a tipping point.